Unemployment as An Epidemic
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Unemployment as An Epidemic
Unemployment is recognized as a chronic problem at a macroeconomics level. Economists refer to unemployment as a persistent challenge because it does not go away entirely even when the economy is expanding. Therefore, there is an ongoing job shortage during recessions and expansions. There are always more jobs seekers that the job opportunities available at any given time. Thus, unemployment is like a disease characterized by three main features: pattern and reoccurrence, virulence, and its impact on the affected and the community (Economy). Thus, to treat the epidemic, it is vital to understand the cause, the patterns, reoccurrence, the impact and how to manage through preparedness and prevention for unemployment.
Causes of Unemployment
Unemployment is a significant indicator in the economy since it indicates the ability of people willing to work to acquire jobs to contribute to the economy’s output. Unemployment is caused by various factors coming from the demand and supply side. Movement between jobs by the workers is one of the factors that lead to unemployment. For example, if a person relocates to a different city, they get unemployed for a period while searching for a new job. Looking for a new job takes time leading to frictional unemployment (Layard et al., 2005). This type of unemployment can be reduced through the perfection of information so that people know what jobs are available and when.
Reduced demand for services and goods also leads to unemployment. When the demand for services and products reduce, the firms require producing less; therefore, they need few workers. The demand in the economy becomes less such that it cannot provide jobs to everyone who wants to work. During the periods when the demand is reduced, the wages become sticky such that they do not fall to reach the level of equilibrium hence unemployment results. This results in cyclical or Keynesian unemployment. According to Keynesian economists, government intervention, such as deficit spending, can increase the supply of jobs reducing this kind of unemployment.
Unemployment is also caused by the disparities (mismatch) in the skills of the people and the skills that the jobs available want. The market of labor is, therefore, unable to employ every person looking for a job. Mismatch in available and needed skills can result from the replacement of employees by machines making the skills of the workers to be obsolete if they spend a lot of time without being employed (Şahin et al., 2014). This type of unemployment is known as structural unemployment.
When the real wage is set higher than the market wage rate, the result is unemployment. The number of people who look for a job when the real wage is high increases to the extent that it exceeds the available vacancies. The type of unemployment resulting from this factor is real-wage or classical unemployment (Layard et al., 2005). Classical economists argue that lowering the real wage since most people drop out of the market and are not interested in seeking employment leaves vacancies to those affected.
When statistics do not recognize a large number of unemployed people while collecting data, there results in hidden unemployment. During the counting of the unemployed people, only those that are looking for jobs actively are considered to be unemployed, leaving out those people who have lost hope in finding employment and those in retraining programs offered by the government even if they are unemployed.
Pattern and Reoccurrence
Just like an epidemic, unemployment has an established pattern flow that it reoccurs in areas with favorable conditions. In most cases, the unemployment pattern follows the business cycle. In developed economies like the United States, unemployment is known to follow the business cycle. When an economy, the economy is at the peak, there is the natural rate of unemployment, meaning that there is minimal unemployment. Unemployment during the peak of a business cycle is mostly frictional and voluntary, which is caused by people who move from one area to another looking for better jobs, college graduates looking for employment, and people unwilling to participate in the workforce.
The peak is followed by contraction or recession, which is characterized by decreased business activities. As a result, employers are forced to lay-off excess employees, which causes a rise in the unemployment rate. For example, in the aftermath of the 2007 financial crisis, the recession followed in the US between 2008 and 2009 recession that caused by employment that peaked about 10.4% by September 2008 (Hout, Levanon, & Cumberworth, 2011).
When the recession is uncontrollable, an economy can progress into a depression where there are minimal business activities within a given country. During a depression, most businesses and farms close down due to low profits, deflation, poverty, and unemployment. During the great depression of the US between 1929 and 1933, unemployment rose to about 25%, with the industrial unemployment reaching about 35% and agricultural unemployment going over 25%. Thus, during a depression, masses are laid off, impacting the entire population.
During recovery, the economy expands with growing business activity. Labor demand increases during the expansion period as more business open up and expand their operations. For example, since 2011, the US economy was on recovery, and unemployment dropped to 8.9% from 9.6% in 2010. The recovery reached its peak in 2014, where unemployment had declined to 6.2%. US economy then began expanding from 2014 to 2019, when unemployment had hit a low of about 3.7%(Hout, Levanon, & Cumberworth, 2011). However, the expansion has been brought to a halt by the Corona pandemic.
Despite their common patterns of unemployment, unemployment remains a huge problem despite the economic cycle time. Economists have developed the natural rate of unemployment, which is the rate at which unemployment is acceptable and is not a problem for the economy. The rate is mostly between 3% and 5 %, depending on the given economy of a country. It means that there is no one time that unemployment is at zero. Thus, the natural rate indicates that because of phenomenon such as college graduates leaving school every year, there is always someone searching for work.
Virulence
Just like an epidemic, unemployment is extremely virulent. History and available literature show that unemployment is like a vicious virus that spreads fast among people, even those deemed to have job security. For example, during a recession, a few people are laid off, but as more businesses lose the market, more and more people are affected by the condition (Tcherneva, 2017). In addition, unemployment is likely to contaminate those close to the unemployed and spread quickly across the community from where it began just like a disease.
In 2007, the burst of the housing sector resulted in a financial crisis. The financial crisis led to a recession characterized by a spike in unemployment in the United States. However, the financial crisis spread across the world. The most affected place was the united state as it was the host of the crisis that developed to be an economic problem. As a result, most Americans were rendered jobless during the years 2008, 2009, and 2010 (Hout, Levanon, & Cumberworth, 2011). The most affected communities were those affected by the housing bubble.
Unemployment spreads like an epidemic and is a pernicious challenge. It creates labor market cycles that are difficult to break. For example, just like a disease has a higher chance of reoccurrence, joblessness breeds unemployability as long-term unemployment results in total unemployment. People who have experienced gaps are less appealing than those with continuous employment. Thus, in job applications, people who are currently employed in a different place are more attractive than those qualified without jobs. The more significant the gap in job experience, the lower the chances of reemployment (Tcherneva, 2017).
According to Tcherneva (2017), joblessness is like a virus; in a host, it is likely to attack the host making the host even more unwell. The same way unemployment spreads within a community and increases the chances of being unemployed in the long run. That is how the great depression affected American society. The effects of unemployment virulence are the unbearable cost to the host (the unemployed), the family, community, and the economy.
Impacts of Unemployment
One of the impacts of unemployment is the loss of the economy’s output. When a large number of people in society are not employed, production is reduced since they could be producing services and goods. Unemployment’s opportunity cost is a reduction in a country’s GDP and GNP. High levels of unemployment indicate that the economy is not operating in full capacity; hence it is inefficient. The result is reduced incomes and output. Those people who are unemployed are unable to continue purchasing a variety of services and goods, which means diminished spending and lower production and GDP (Tcherneva, 2017). According to the law of Okun, a one percent reduction in employment leads to a three percent rise in a country’s GNP. A one percent rise in the unemployment rate leads to a decrease in GDP by two percent.
Unemployment also leads to a reduction in revenue obtained from taxation. When a large number of people are not employed, they have no income from which tax deductions can be made. Tax such as Value Added Tax obtained from goods purchased is also reduced due to reduced spending by the unemployed consumers hence reduced tax revenue (Tcherneva, 2017). Reduced revenue leads to increased borrowing by the government. The government needs to spend extra on the unemployed and the benefits that they receive, therefore the need for borrowing, which can put the country a bad position of debts in the future.
Unemployment leads to inequality and poverty directly and indirectly. With unemployment, there is increased inequality between capital and labor, as well as between individuals. Those individuals who are employed tend to be in better positions to spend and have a high living standard. In contrast, the unemployed have reduced income, making them have poor living conditions. Poverty is measured through income. Unemployed people tend to be poor since they have reduced or no pay. If individuals in a household are in a state of unemployment for long periods, they end up borrowing funds that increase their debts and further increase their poverty (Saunders, 2002). Poverty and inequality lead to an increase in demand for welfare programs.
To the unemployed individual, unemployment leads to depression and mental illnesses since they are unable to cater for their needs as a result of reduced earnings. Unemployment has been associated with frequent visits to the doctor and increased spending on costs for healthcare. The unemployed suffer from high alcoholism rates, anxiety, depression, and physical illnesses (Tcherneva, 2017). The different health effects of unemployment develop a vicious cycle preventing the individual from getting back to the labor market. Health issues indirectly lead to poverty and inequality due to prolonged periods of unemployment.
Unemployment also affects the livelihood of unemployed families and the community at large. The education of children, outcomes of the labor market, and social mobility are affected by unemployment. It is through unemployment that economic and urban crimes increase. When a large number of people in a community are unemployed, crime rates increase, mainly because they are idle and have no income; hence they turn to crimes like drug trafficking and theft to gain some income. A strong correlation exists between crime and youth unemployment. Nonviolent and violent crimes are closely linked to unemployment. A study conducted in the United States indicated that many crimes are an underlying result of poverty resulting from unemployment among the youths and not deviant behavior amongst them (Raphael, & Winter-Ebmer, 2001).
Managing the Unemployment Epidemic
Governments are responsible for dealing with unemployment. Governments, unlike individuals and groups, has the capacity to develop policies or laws to address joblessness. Just like health organizations have to stay prepared for an epidemic, the government must remain ready to address unemployment through various interventions. Thus, preparedness and prevention strategies for unemployment remain a big responsibility for the government. The government engages both the public and the private sectors in preventing and mitigating unemployment.
The government influences policies to reduce unemployment levels. The government influences the supply and demand-side policies as a way of preventing unemployment. Most governments struggle to maintain the natural rate of unemployment. However, some governments like the US government make good use of policies to avoid unemployment or bring the unemployment rate down. The demand-side policies are developed to boost aggregate demand in the economy-boosting consumption and keeping the economy running. Thus, the government uses monetary policy, such as cutting the interest rates to increase borrowing and spending, thus boosting the Aggregate demand. The government uses fiscal policy, such as higher government spending to create jobs and cut taxes to boost spending. The government also influence the exchange rate to boost export demand. These are some of the US government’s strategies through the Federal reserve between 2009 and 2014 to help boost demand and help the economy recover.
According to Nie and Struby (2011), supply-side policies help improve labor. Some of the supply-side government’s policy is improving education and training aspects in the labor market to solve occupational immobility. The government also influence wages, and labor union thus controlling the rate of employment. Eliminating labor market regulation, geographical subsidies used to help firms, and workers move are other forms of supply-side policies used by the government to prevent spikes in unemployment.
Conclusion
Unemployment is caused by various factors which include movement from one job to another by individuals, the setting of real-wage above the existing wage in the market, mismatch of skills in the market of labor where workers do not have the skills needed in the market, and low demand for services and goods. The factors lead to the different types of unemployment, including cyclical, structural, and frictional, among others. Unemployment leads to loss of output since the economy operates below the maximum potential. Tax revenues reduce due to unemployment. Government debts increased as a result of increased borrowing. Unemployment also leads to increased poverty, crime rates, and inequality as a result of reduced income.
References
Hout, M., Levanon, A., & Cumberworth, E. (2011). Job loss and unemployment. The great recession, 59-81.
Layard, R., Layard, P. R. G., Nickell, S., Nickell, S. J., & Jackman, R. (2005). Unemployment: macroeconomic performance and the labour market. Oxford University Press on Demand.
Nie, J., & Struby, E. (2011). Would active labor market policies help combat high US unemployment?. Economic Review-Federal Reserve Bank of Kansas City, 35.
Raphael, S., & Winter-Ebmer, R. (2001). Identifying the effect of unemployment on crime. The Journal of Law and Economics, 44(1), 259-283.
Şahin, A., Song, J., Topa, G., & Violante, G. L. (2014). Mismatch unemployment. American Economic Review, 104(11), 3529-64.
Saunders, P. (2002). The direct and indirect effects of unemployment on poverty and inequality. EAST WEST REVIEW OF LABOR LAW AND SOCIAL POLICY, 7, 177-216.
Tcherneva, P. R. (2017). Unemployment: The silent epidemic. Levy Economics Institute, Working Papers Series, (895).